March 13 (Bloomberg) -- The euro fell versus the dollar as
the European Central Bank signaled it’s monitoring gains in the
currency for deflation risks. The yen rose on demand for a haven
amid turmoil in Ukraine and pessimism about China’s economy.

Europe’s shared currency sank as ECB President Mario Draghi
said its level is “increasingly relevant in our assessment of
price stability.” It earlier approached $1.40, the highest in
more than two years. The greenback slid against the yen even
after U.S. retail sales rose for the first time in three months.
Yen weakness is a top three- to six-month trade conviction,
Goldman Sachs Group Inc. said in a report. Australia’s dollar
gained as employers added the most full-time jobs since 1991.

“The ECB is reacting in part to the trend in the euro,”
Sebastien Galy, a senior currency strategist at Societe Generale
SA in New York, said in an e-mail. While “$1.40 means little to
an economist, it does a lot to corporates complaining to their
central banks.”

The euro fell 0.3 percent to $1.3868 at 5 p.m. New York
time, after rallying earlier to $1.3967, the highest since
October 2011. The yen strengthened 0.9 percent to 101.84 per
dollar and touched 101.54, the strongest level since March 4.
The Japanese currency climbed 1.1 percent to 141.25 per euro and
reached 140.72, the strongest since March 6.

Treasury Yields

Japan’s currency extended its advance against the dollar
today as yields on U.S. Treasury 10-year notes dropped, dimming
the appeal of dollar-denominated assets. The yields sank as much
as nine basis points, or 0.09 percentage point, the most since
Jan. 23 on an intraday basis, to 2.64 percent. They increased
earlier to 2.75 percent.

“We expect another leg of yen weakness as it becomes clear
over the summer that the first round” of stimulus by the Bank
of Japan isn’t enough to meet the government’s goal to raise
inflation to 2 percent, Goldman Sachs strategists Robin Brooks
and Fiona Lake said in a report issued today.

This will spur the central bank into another round in about
June that will weaken the yen to 107 per dollar by mid-year and
to 110 by year-end, they wrote.

Volatility Rises

Deutsche Bank AG’s Currency Volatility Index, based on
three-month implied volatility on nine major currency pairs,
rose for the first time in four days. It jumped 22 basis points
to 7.36 percent, a one-week high, after falling to 7.14 percent
yesterday, the lowest level since December 2012.

The U.S. and Germany stepped up pressure on Russia to back
down from plans to annex Crimea from Ukraine after the region
holds a referendum in three days, warning they’ll exact an
economic toll if Russia doesn’t.

Since shortly after the U.S. retail-sales data, “it’s been
one way down for dollar-yen,” Brad Bechtel, managing director
at Faros Trading LLC in Stamford, Connecticut, said in a phone
interview. “Ukraine is definitely out there, of course, and is
adding tension.”

Retail sales rose 0.3 percent in February, according to a
Commerce Department report, pointing to an economy regaining
traction after a harsh winter. Sales dropped 0.6 percent the
previous month, more than initially reported.

Draghi said his forward guidance may help to weaken the
euro and lower real interest rates. He said in a speech in
Vienna that “any material risk of inflation expectations
becoming unanchored will be countered with additional monetary-policy measures.”

More Vocal

While central-bank officials in Europe have been more vocal
about the common currency, markets may doubt whether the ECB,
which cut its benchmark rate to a record-low 0.25 percent in
November, has the flexibility to ease further, Robert Lynch, a
currency strategist at HSBC Holdings Plc in New York.

“For months, you had virtually no comments on the
currency, and now in the past week, more days than not, you’ve
had ECB officials commenting on the euro,” Lynch said in a
phone interview. “One of the main things that’s different is
the ECB, in the market’s view, has a lot less policy
flexibility.”

ECB Governing Council member Christian Noyer said March 10
in a Bloomberg Television interview that a strengthening euro
creates unwarranted pressure on the euro-area economy.

“A lot of people are talking about the $1.40 level on the
euro,” Marc Chandler, a currency strategist in New York at
Brown Brothers Harriman & Co., said in a phone interview.
“Above $1.40, I think people will also come around to my view
that it increases likelihood the ECB is going to cut next month.
I was thinking the $1.40 area would be the top, but I could see
a move toward $1.42.”

Gradually Recovering

The euro region’s economy is gradually recovering in line
with the central bank’s baseline scenario, Draghi said on March
6 after policy makers left the main refinancing rate at 0.25
percent.

Australia’s dollar climbed after the statistics bureau said
employers added 47,300 positions last month, surpassing the
15,000 gain forecast in a Bloomberg survey.

The Aussie gained as much as 1.3 percent to 91.04 U.S.
cents, the highest since March 7, before trading at 90.31 cents,
up 0.5 percent.

The Canadian dollar rose against the majority of the
greenback’s 31 most-traded peers, gaining 0.4 percent to
C$1.1076 per U.S. dollar. Poland’s zloty was the biggest loser,
dropping 0.6 percent to 3.0560 per dollar.

China’s retail sales increased at a weaker-than-forecast
11.8 percent annual pace in the first two months of the year and
the nation’s growth in industrial production slowed to an 8.6
percent rate, data showed. China reported over the past week its
biggest trade deficit in two years and slowing inflation.